Sizing up the LinkedIn bubble

Would you believe the value of LinkedIn has risen 19-fold in just over two years?

You must if you are planning on buying into its initial public offering. LinkedIn is expected to go public this week at a price above $40 a share. That’s a far cry from the $2.32 a share the networking-for-professionals outfit valued itself at as recently as the spring of 2009.

The sky: it is the limit

That said, the company admits in offering documents that it has moved the goalposts at least once in estimating what its shares are worth. That nifty move, you’ll be shocked to learn, stands to benefit insiders such as LinkedIn’s founders and executives at the expense of those buying in at the inflated IPO price. Does any of this sound familiar?

LinkedIn is looking to sell shares at between $42 and $45 each this week. An IPO that prices in that range would value the company, which made $15 million last year, at $4.1 billion. That’s 267 times earnings if you’re keeping score at home.

That document contains a section that explains how the San Francisco-based company’s board decided to price the $611 million worth of stock options it granted employees in LinkedIn over the past two and a half years.

When the company granted options in February 2009, for instance, it valued them at $2.32 a share. It maintained that price in three subsequent grants that year. Among the factors in those valuations, LinkedIn said, were “continued weakness in our business” and “uncertainty surrounding the U.S. and global economies.”

But as business picked up and the economy started to recover, the company raised the strike price to $3.50 that September. It maintained that price for the rest of 2009, before citing improving revenue growth, strengthening financial markets and the increasing likelihood of an IPO for seven grant-price increases in 2010 and 2011.

Even after all those increases, the company said a “contemporaneous valuation of our common stock as of March 17, 2011” put the value at just $22.59 a share — barely half the expected offering price specified in the latest filing this month.

The company, eager to explain away that rather large gap, now attributes it at least in part to the use of a substantially different set of comparable companies to determine our price range as compared to the comparable companies utilized in our valuation report. Specifically, the comparable company analysis used to determine our anticipated offering price range focused more on Internet businesses that have similar rates of growth as we do, rather than smaller companies that do not share these characteristics.

That is to say, LinkedIn is either A) using actual comparable companies now after previously choosing dogs to justify its underpriced stock option grants, or B) using hyped-up comparisons now in order to justify the bubbly market-will-bear price. Which do you prefer? A spokesman didn’t immediately return an email seeking comment.

In any case, there is one characteristic that practically all IPO companies share, and here LinkedIn is no exception: A desire to enrich insiders at the expense of public offering buyers. Be very careful indeed before you accept the invitation to join the LinkedIn investor club.